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What happens to people after foreclosure?

Among surprises from new research: For those forced to move, it's not always for the worse.

By MSN Money Partner Jul 28, 2011 9:33AM

This post comes from Marilyn Lewis at MSN Money.


Foreclosure. It's the F-word these days. It carries images of homelessness, shame and ruin. For many people, that's true. But for others, apparently, the effects are not catastrophic.


For example, foreclosure doesn't completely lay waste to a credit score. Certainly, it damages it, but bankruptcy causes more of a drop in FICO scores. Oddly, the lower your score to begin with, the less it is affected. The higher the score, the bigger the impact. But even if you started with a high score -- 780 or above -- you might still make it out of foreclosure hanging on to a FICO score as high as 640. (Estimate your credit score for free.)


Adding to the small trove of information about the effects of foreclosure on people's lives, two researchers from the Federal Reserve recently published some surprising findings.


Researchers Raven Molloy and Hui Shan used "a unique dataset based on the credit reports of a large panel of individuals from 1999 to 2010." Here's their paper: "The Post-Foreclosure Experience of U.S. Households."


Molloy and Shan looked at a small slice of the issue: how a foreclosure affects people's housing afterward. They wrote:

Some of our findings are consistent with common beliefs. Post-foreclosure individuals experience more changes in household composition and are less likely to live in owner-occupied housing. They also tend to move to denser, more urban neighborhoods.

Other findings were surprising, they said. Most unexpected, perhaps, was their discovery that, while foreclosure does force many people to move, most "do not end up in substantially less desirable neighborhoods or more crowded living conditions."


Not out on the street

The image in the popular imagination is that, once foreclosure's begun, the home's occupants are out in the street. And yet:

Only about half of borrowers whose mortgage enters foreclosure have moved even two years later, suggesting that many foreclosures are worked out through refinancing or other means.

"Other means" no doubt also includes the reality that banks right now simply can't process the foreclosures they've initiated. Years later, many people in foreclosure are still in their homes with no idea how much longer they'll stay.


Two million foreclosures are at some stage of the process currently, with "another 2 million waiting in the wings," wrote The New York Times recently. Nationally, the average time to complete a foreclosure is 400 days, reports The Washington Post. New York's average foreclosure takes place in 924 days -- 2½ years. In Dade County, Fla., it takes an average of 738 days.


Shan and Molloy say they were surprised to find that "borrowers who do move after a foreclosure … do not seem to end up in substantially more crowded living conditions or less-desirable neighborhoods."


And here's another common perception -- that many families end up bunching together or moving in with family after foreclosure. It, too, is skewered by the Fed paper:

Only a small fraction of post-foreclosure individuals seem to move in with their parents. In short, we find little evidence that many people end up living in larger households in order to defray living expenses.

It is true that some researchers have been finding household size increasing in the U.S. and they link that to financial stress and the recession. But they have been looking at everyone -- not only households affected by foreclosure.


Skewering more perceptions

Not much research has been done about what happens to people after foreclosure, but links to some of what there is have been gathered here.


Foreclosure is particularly disruptive for children. A kid's world, which centers on school, is turned upside down when the family has to move suddenly.


"Foreclosure and Kids: Does Losing Your Home Mean Losing Your School?" (.pdf file), a paper by the Furman Center for Real Estate & Urban Policy at New York University tries looking into the question.


Unfortunately, the paper is based on data that's several years old. It focuses on New York City, not the entire country, so there's no telling how widely applicable the findings are.

It's an interesting snapshot, though:

  • 2% of New York City's public school students were affected by foreclosure in 2006-2007.
  • Most (78%) were poor and were participating in subsidized school lunch programs.
  • On average, students who moved to new schools after foreclosure went to lower-performing schools. But that was true, too, for most students changing schools in the city that year.

No downward mobility

The Fed paper, by contrast, finds that, when homeowners are forced out, they don't necessarily "move down." And many who move to rental housing appear to rent single-family homes, not apartments in large complexes:

Although foreclosure increases the probability that an individual will move to a multifamily building, most post-foreclosure migrants remain in single-family structures. Moreover, their new neighborhood does not have significantly lower median income, median house value, or median rent than their old neighborhood.

"The evidence suggests that post-foreclosure individuals move to rental units in denser urban areas, but the new neighborhoods do not seem to be much less desirable," the paper says.


Also, most people who do move because they've lost a home to foreclosure end up staying in the same job market, although not necessarily in the same school district, the Fed researchers found.


More on MSN Money:

Oct 28, 2011 1:02PM
I'll tell you what happens to people after foreclosure...they become heartsick and depressed! Especially when it's government promises a reprieve and then kicks you out of your home. A home is not something you's something you build..with sweat, heart, and soul...
I worked everyday (all day) for 10 years to acquire my lovely home. I put all my heart and money into making my home, my forever home. After my business folded, I fell 70 days behind, and when I tried to make up the payments to bring them current, I was told I was in foreclosure. GMAC refused my payments and refused to work with me. In 8 years I was never late with my payment...not once! In fact they never even called me once throughout this foreclosure! And I was notified of the foreclosure by calling to make a payment! GMAC thinks changing there name to Ally will remedy the evils they have done. But Facts are facts...and Freddy Mac was no help what so ever...I lost all my furnishings...and could take only what would fit in a storage unit, and in my car....I slept in my car for a while out in front of my home, then my work. I lost everything I worked so hard for...and I got nothing....altho Freddie Mac sold my home for $30,000.00 more than I owed. 
Move ahead one year later..My once perfect credit is shot all to hell... I live in a trailor, still work, am constantly depressed, drink like a fish, and am still heartsick! I will never get over this. I don't believe in my own government anymore. How can I when there is laws to protect corporations, but not it's own citizens..? GMAC actually told me they can foreclose if my payment is one day late! John McCain was no help....Gabriel Giffords was no help...Jeff Markowitz @ Freddie Mac was no help..& Obama was no pleas went unheard. Altho they were all kind in their replies I still got royally screwed. My grief is unbearable! So, the fact is, this is what happens to people after foreclosure! and BTW, I am not a statistic, I am a thinking, feeling human being!
Apr 4, 2012 7:22PM

Thanks for making foreclosure look so rosy!  You are dead wrong.  For those it does hit, and the likes of Bank of America - who foreclosed on me in 150 days, despite 2 years of trying to sell, and having 2 short sale cash offers (which their own people failed to complete the paperwork on time - still fighting them) I was forced to move.  And while you indicate "some" rent single family homes - you are still missing the point.  I was forced to move out, and given barely what would cover 1 months rent and expenses.  Landlords want 1st, last, security and also people with good credit. 


I find this article obsurd.  Real people are really impacted and nobody cares.  Oh wait, that's because none of you have had this happen and blame those it did happen to that it's our fault.  WRONG!

Oct 29, 2011 5:57AM
I can relate to the insensitive way banks squeeze us all. I am currently in the death throws of a forclosure on what I considered the home of my dreams. At the time of purchase, I was told I wold not be able to use my VA benefits for a VA loan; it would take too long-  so I caved - got the house, but with a higher interest ARM. "Not a problem" I was told , I could refinance to a fixed rate after a year. I did, but  all the fees were tacked on and the interest rate was over 8% when loans were going for 6% because my credit was less than stellar. Now I'm  hammered with icome loss and increased health care costs- and have been trying to work with my bank to modify my loan. The bank still won't do a VA LOAN' and at one point I was told over the phone to" GO get a JOB.." I was working three at the time.
Oct 29, 2011 11:14AM
I was foreclosed on and I just feel that the bank I used, did so illegally. The letter they sent to their attorneys told them to start foreclosure proceedings. It read that I was two (2) months late on payments that was their fault. If they would had gave me the extension on my loan instead of putting me into a loss migitation program, then I would never had been foreclosed on. I would been able to repay some of my bills and been able to refinance in a proper way. Now, I was very fortunate that by GOD's Grace, I have a home of my own within my budget and I don't have to worry with a bank about the payments at all. Yes I do have to pay rent, but all I am paying is the insurance and the taxes for a couple who inherit this home.
Sep 12, 2012 9:54AM
when my husband suggested that we sell our two story dream house to get a smaller one story in light of complications of my recent kidney transplant, I reluctantly agreed.  it was 2005 and the house sold in one day. We cleared 25,000 on the sale and purchased a smaller home in the same neighborhood by the same builder.  The closings were one after the other on the same day, so movers were at the ready.  The old house closed in the morning, in the title co lobby my husband of 16 years said he was :leaving:, when I asked where he said " You are too much responsibility. I want to go  camping and jet skiing and I dont want to go alone"  and he was now "dating" a 13 yrs younger co worker who "makes plans for us and doesnt need help". He wasnt interested in signing on a house for me and his kids,obviously. I called the lender in shock to say my husband was not going to sign and i had to pull out of the sale. The lender said, no problem, with your credit you can just sign for it-but the interest rate will be a little higher. In 4 hours I had a new loan with my name and no kind of income verification ( of course my husbands 6-figure income was still mine at that point) Not knowing where to go, movers were at the house, and not wanting to futher disrupt my sons, I signed it. Figuring I could sell it if he actually left us. Cut to 2007, I was a single mom with major health issues. Luckily I got  generous  child support payments. and had a good job, but still could in no way afford the 2000 a month payments. I  then discovered I was prohibited from selling the house for 3 years.  I notified the bank and stopped paying and put the house for sale ,after the bank refused 3 cash offers  it was clear that countrywide had NO interested in not foreclosing.  For some reason the house never showed up on my credit and I was able to purchase another home within 3 years. However, it was wildly inappropriate for that loan officer to redo that crappy loan after i told him my husband was leaving me. ridiculous, but i can say it did not affect me, for whatever that does happen. 
Sep 22, 2012 2:33PM

I was foreclosed on and I lost everything in 2011 and 2012 I went bankrupt.  Not an easy thing to go through.  I lost my family through divorse. WOW what else can I loose?


Mar 2, 2012 5:23PM

If rent, the 1986 Tax Code provides that collected up front last month's rent is considered rent when collected. Who knew?


If a landlord keeps security deposit, it's considered rent, and subject to reporting. Who knew?


Could the IRS be out of pocket on these points depriving millions of much needed rental deductions on their tax returns where deductions are allowed?



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